Hims&Hers Health: My Take

Recently, I have sold one of my positions leaving cash available to reinvest in other investment opportunities. Consequently, I started researching some companies I found interesting at first glance. For Hims&Hers ($HIMS) was one of them.

Initially I was impressed by For Hims&Hers, a company succeeding in the complex telehealth market. The company really catched my eye initially as it was executing the same playbook as other aggregators before: employing IT to become a one stop shop for an unaddressed customer need, streamlining the process, removing intermediaries and providing a product or service on a more cost-effective way.

However, upon closer inspection, certain qualitative factors raised concerns about the company. Hence, I am sharing with you in this write-up, what differs significantly from my usual content, why I’ve decided to exclude For Hims&Hers from the watchlist based on those qualitative factors mentioned.

DISCLAIMER: This article is not a recommendation to buy or sell any financial instrument, the content is educational and my personal opinion. Each person has to make his own analysis. Any action or decision you take as a result of viewing this article is your sole responsibility.

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Introduction to the company

Hims & Hers Health, Inc. (from now on HIMS) is a telehealth company that focuses on providing personalized healthcare solutions and wellness products through its online platform. Founded in 2017, the company aims to address various health and wellness concerns in a discreet, convenient, and accessible manner, providing not only diagnosis services but also fulfilling patients medications needs during the whole treatment duration.

Users can consult with third-party licensed healthcare providers remotely through the platform and receive personalized treatment plans. Prescriptions are fulfilled online, and the platform operates on a subscription-based model.

The company's business model is vertically integrated, encompassing a telehealth platform, an e-commerce platform and a fulfillment network with last mile partners. It is important to highlight their medication offering can be splitted into two groups: non-personalized drugs and personalized medication.

Non-personalized drugs refers to branded medications & generics that all of us are familiar with. On the other hand, the personalized drugs category refers to custom made drugs. These are known as compounded drugs. Compounded drugs are formulated by pharmacists or physicians to meet a specific patient's needs, adjusting factors like dosage, form, ingredients, or flavor. HIMS owns facilities which manufacture and formulate its own compounded drugs.

Their product offering is covering the following verticals: hair loss, sexual health, weight loss, skincare, mental health and wellness. Moreover, there are plans to keep expanding the medication assortment.

My Key Concerns

I think once some background has been provided by briefly describing HIMS business model and products offering I can share my concerns realted to the qualitative aspects of the company. There are five main areas of concern:

Predictive Medicine Implementation

Thanks to the digital nature of HIMS' business, they have the capacity to collect patient data, building a comprehensive "health database." With the growing influence of data science over the past decade and the recent advancements in AI, HIMS could leverage this data to gain a competitive edge, particularly over traditional healthcare providers. This would enable them to offer highly personalized treatments and even anticipate health issues before they arise—a concept commonly known as predictive medicine.

In this regard, HIMS is currently utilizing AI through their proprietary MedMatch platform. MedMatch is designed to optimize clinical decision-making by analyzing millions of anonymized patient data points, such as demographics, treatment histories, and outcomes. This AI-driven tool provides providers with insights to recommend tailored treatments. Initially, MedMatch is being applied in mental health treatment, focusing on conditions like anxiety and depression..

In my opinion, health and the human body are extremely complex to be able to develop models which can accurately predict health conditions in the middle term. I recommend you to read Peter Attia’s book Outlive: The Science & Art of Longevity. The main takeaway relevant to this discussion is that human health is a highly intricate field, with each individual being unique due to their genetic profile and the environment where they live. Hence, additional data sources beyond medical and family history or standard form inputs will be necessary. Examples include heart rate and sleep tracking, DNA testing, hormone level analysis, and physical performance assessments.

Moreover, in certain areas like nutrition, scientific evidence remains limited or inconclusive, underscoring the need for further research that can distinguish between correlation and causation. For instance, a widely known example is red meat consumption, current studies struggle to determine whether the increased cardiovascular risk associated with its consumption is directly caused by eating red meat or if it is associated with other lifestyle factors commonly observed in population groups which consume more red meat.

In conclusion, research must first establish the evidence to create general models, followed by the time-consuming and costly task of gathering highly specific health related data for each individual. As a result, while the ability to process large volumes of data is expected to improve in the coming years, the necessary foundational steps are still lagging. This gap could prevent HIMS from fully utilizing advanced analytics to offer customized treatment recommendations for its patients in the mid to long-term. hence I am overly conservative on my time estimation for this optionality to be realized compared with what other research articles project.

Compounding of Drugs

HIMS provides customized drugs designed to meet the specific needs of each patient. CEO Andrew Dudum has highlighted the company's focus on personalized treatments as a key differentiator in its value proposition. Although, it should be highlighted that there is no scientific consensus regarding compounding benefits.

However, in my opinion, three major risk areas emerge when considering compounded drugs: the prescription of compounded medication, quality & patients safety and GLP-1 compounded drugs offering.

The Compounding Contradiction

This section focuses on the process of getting prescribed compounded drugs through HIMS. Firstly, let’s provide an overview on the process a patient has to follow to get a compounded drug prescribed:

1. The patient’s condition is evaluated during an online appointment with a doctor, scheduled through the HIMS app. Based on the doctor’s assessment of the available data, the patient may qualify for a personalized treatment plan.

2. A doctor experienced in formulation will design a customized medication tailored to the patient’s needs.

3. The request for manufacturing the personalized medication is sent to a compounding pharmacy, which specializes in creating such formulations and will fulfill the request.

However, as it is reported by different sources, both bullish (Hims House podcast - Episode 5: The Customer Journey) and bearish (Hunterbrook short report), it is possible to get compounded GLP-1 by filling some standard forms and without doctor consultation. This leads to three scenarios:

• HIMS utilizes a limited set of profiles to categorize patients based on responses to a standard form.

• The company also offers a model that can adjust formulations to meet individual patient needs.

• HIMS employs formulation specialists who review the information provided by patients and tailor the drug composition to suit each person's specific requirements.

The greater the level of customization, the more limited the potential advantages of scaling up. As HIMS expands, I believe the anticipated benefits of compounding will be undermined. It will become increasingly difficult to create individually tailored drugs for each patient, which raises the risk of inadvertently causing harm.

Quality & Patient Safety

HIMS has acquired a 503A compounding pharmacy and also a 503B one. 503A pharmacies are regulated by the state where they are located and used to produce small customized batches while 503B Outsourcing facilities are subjected to FDA scrutiny and produce compounded drugs for broader distribution. However, the fact that there is an existing scrutiny from authorities does not mean the same quality standards are enforced in compounding pharmacies.

Firstly, compounded medications are not FDA approved as they do not undergo the same rigorous testing procedures as FDA-approved drugs, which are subjected to clinical trials where safety and efficacy are evaluated across diverse population groups. Moreover, the lack of FDA approval leads to the safety responsibility of the compounded drug laying with the prescriber and pharmacist (in this case HIMS due to the vertical integration). See a comparison between both processes in Figure 2.

Secondly, as drugs are not approved by the FDA, the quality system requirements are lower in areas such as QC testing, labelling, adverse-events reporting or inspections. In simpler terms, the regulatory framework ensuring the quality of compounded medications is not as robust as that for traditional, FDA-approved drugs.

Adverse events due to compounded drugs have been reported. Their seriousness have led to countries like Australia forbidding GLP-1 compounded version since October 2024, after initially allowing it to counter their shortage.

In conclusion, I may be biased due to my professional background in the pharmaceutical industry, but I find this to be the most concerning risk because healthcare companies must always have a centric patient safety approach.

GLP-1 Compounded Drugs Offering

To the doubts on compounded drugs prescription process and quality standards under which they are manufactured where not solid and robust enough, we should also add the additional risk introduced through GLP-1 drugs compounding.

The compounded GLP-1 drugs offered are injectable formulations, which are more effective but require higher quality and stringent aseptic standards to ensure safe production that compounded pharmacies are not required to have. This poses a risk to patients' health, placing additional scrutiny on HIMS, as Novo Nordisk and Eli Lilly—the pharmaceutical companies currently offering GLP-1 drugs for obesity—are legally required to monitor and oversee their manufacturing and use.

Regulatory Risk

The healthcare and pharmaceutical industries are highly regulated. HIMS is currently exploiting the grey areas in that industry such as providing medical services without insurances and drugs compounding. Additionally, HIMS faces greater litigation risks compared to other companies in the pharmaceutical industry. This greater exposure stems from the previously mentioned factors, including the manufacturing and offering of compounded drugs (HIMS is not solely a distributor and telehealth platform due to the compounded pharmacies acquisitions), higher regulatory focus in the loopholes they are exploiting and potential patent infringement concerns related to GLP-1 knock-off medication versions.

It then seems reasonable to me to anticipate regulatory changes driven by lobbying efforts from pharmaceutical and insurance companies, along with regulatory agencies enforcing stricter quality standards if compounding keeps gaining popularity. However, the impact of these potential changes is uncertain, adding another reason to rule out the HIMS as a potential investment.

Incentives Structure

HIMS cannot employ any doctors working in their telehealth service. Doctors who want to work for HIMS need to join or establish an affiliated medical group. A majority of that group are created with the sole purpose of working for HIMS. The HIMS provides the platform to connect doctors and patients. It is relevant to add that it is not publicly disclosed if doctors working for HIMS get any performance bonus related to prescriptions volume.

This is relevant, and it sets the scene for a scenario of misaligned incentives because HIMS follows a vertical integration strategy as it manufactures and distributes its own drugs, especially the customized ones through compounding. A compensation model based on prescription volume could lead to over-prescribing or incentivizing treatments that may not be in the best interest of patients.

Despite HIMS business being focused on non-life-endangering and recurring health conditions, I think their business model has itself to navigate through the contradiction of losing customers if their service is successfully provided. As I patient if I heal I might unsubscribe as the ecosystem of health conditions currently covered by Hims is limited.

In summary, HIMS, with its innovative business model, effectively addresses the misaligned incentive structure of the American healthcare system. However, this model introduces its own set of incentive contradictions, leaving uncertainty about their potential impact on customer experience or the business's performance in the medium to long term.

The Management

I will be very direct on this section: I don’t trust HIMS CEO, Andrew Dudum, and I don’t like many of the steps and actions taken by the company as I have described along this write-up.

Moreover, In 2021 there was a payment from HIMS to Atomic Labs, the venture firm which incubated the company during its early stages, of $3.6 million. The payment was part of a contractual agreement related to services provided by Atomic Labs in its early stages. Andrew Dudum, co-founded Atomic Labs. It is true that he owns approximately 10% of HIMS. However, considering the ongoing shareholder dilution in recent years, along with the misaligned incentive structure outlined in the company’s remuneration report, it raises concerns that the interests of regular shareholders may not be at the forefront.

Insiders’ behaviour does not help me on gaining confidence in the management either. They have been constantly selling their stock during the last year as shown in figure 3.

Secondly, I appreciate seeing individuals who are deeply rooted in their industry, a concept from Peter Thiel's book Zero to One. In this context, when I hear Andrew Dudum speak publicly, I see a highly charismatic businessman, but one who lacks a deep background in the healthcare sector.

One aspect of his speech that I find particularly problematic is when he equates the safety of compounded drugs to the accompanying Certificate of Analysis (CoA) that HIMS includes with each medication. The CoA is just one part of a broader quality system that supports the manufacturing of any approved drug. In the case of regulated prescription drugs, it's very uncommon for a CoA to be included directly within the packaging. This is because pharmaceutical companies have a more comprehensive and robust quality system in place to ensure drug quality at every stage of production, as well as full traceability. Either he fails to acknowledge these complexities or he intentionally oversimplifies them, presenting it in a more favorable light. Neither of them is acceptable.

Finally, I am skeptical about management’s vision because I believe their foray into compounding GLP-1 might be harmful in the long-term. HIMS gained a lot of attention but compounding too. As a consequence, compounding has now more scrutiny (bad for HIMS but great for patients) and it is now more likely that the loopholes HIMS is exploiting in this area to be addressed.

I firmly believe that For Hims & Hers is an outlier in the promising telehealth market. I hope that in ten years, this compilation of risks will be irrelevant, either forgotten or remembered as a meme of the not that smart pessimist investor, as the company has succeeded helping countless patients in its way. However, given the significant market attention the stock has garnered, I feel it's important to share my perspective on why I'm choosing not to invest. I think it might help others stay well informed and promote them to check the information against other bullish investment researches on the company so the can have the full picture to make their own decisions.

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